What is a 1031 exchange?

Section 1031 of the tax code provides for the deferral of capital gains taxes from the sale of real estate. Exchanging defers the recognition of the capital gains tax. The tax code states, "No gain or loss shall be recognized on the exchange of property held for productive use in a trade or business, or for investment purposes if such property is exchanged solely for property of like-kind, which is to be held for other productive use in trade or business or for investment purposes."

"Like-kind" does not refer to the property type or quality, rather its intended use. Provided the property is acquired and held for either business or investment purposes, it can qualify as a suitable replacement under IRC Section 1031. (i.e., an apartment building for an office building, bare land for improved property, a distribution center for a regional mall). All real property is "like-kind" with other real property.

Basic Tax Deferred Exchange Requirements

In a delayed exchange under Section 1031, the property currently owned is called the "relinquished" property and must be exchanged for like-kind "replacement" property.

  • Requirement One: Properties must be held for investment or used in a business. The IRS uses the term "like-kind" to describe the type of properties that qualify. Properties which are clearly not like-kind are "held for sale."
  • Requirement Two: The IRS requires an investor to identify the replacement property(s) within 45 days from closing on the sale of a relinquished property. The 45 Day Identification Period begins on the closing date, and the replacement property(s) must be properly identified in a letter signed by the Exchanger and received by the Qualified Intermediary. 180 days between the sale of the relinquished property and the purchase of the replacement property.

Tenant-in-Common Ownership

Co-Owned Real Estate or as it is more popularly know, Tenant in Common (TIC) property ownership, allows investors, generally with a million dollars or less, to own a undivided fractionalized interest in a professional managed institutional quality commercial property. Each owner receives their pro rata share of the cash flow, tax benefits, and appreciation, not as limited partners, but as individual owners evidenced by a separate deed and title policy based on their ownership interest.

Who might consider a Tenant in Common Investment?

  • Investors who are seeking to defer their capital gains tax.
  • Investors who are in their 45 day identification period and need a reliable replacement property or need a back up option in case their replacement property does not close.
  • Investors who have traded down and have excess proceeds in their 1031 exchange and rather than pay tax, would like to reinvest the proceeds and receive a 100% tax deferral.
  • Investors seeking greater cash flow and appreciation return potential than they are receiving from their current real estate investments.
  • Investors who want to take a passive management role.
  • Investors who want to diversify into higher quality real estate but lack the experience or capital to acquire and manage a larger asset.
  • What are the Benefits of (TIC) tenant in common Investments?

Tenancy in common (TIC) or Co-Owned Real Estate (CORE) properties are a popular choice for 1031 exchange investors for the following reasons:

  • Management Free Ownership – TIC property eliminates the day-to-day hassles.
  • Flexible/Simplicity – TIC property can be easily matched to meet your investment needs and debt/equity requirements.
  • Minimum Investment Requirement - Exact Dollar Matching.
  • Higher Quality Property – You can own a share of a commercial property which are generally only available to institutional owners.
  • Diversification - TIC investments allow 1031 exchange investors to take their exchange proceeds and reinvest into different properties.
  • Higher Income and Growth Potential – TIC investors receive their prorata ownership of cash flow, depreciation, and appreciation.
  • Non Recourse Financing - Loans are non-recourse, fixed interest rates with 5-10 year terms.
  • Deeded Interest – You receive a deed which can be transferred.
  • No Special Allocations - All the TIC’s receive cash distributions, sale proceeds, and the depreciation tax benefits in proportion to their ownership.
  • Defined Exit Strategy – Holding periods are between 5-10 years.
  • Estate and Tax Planning Tool – Heirs receive a step up in tax basis equal to the fair market value of their ownership eliminating capital gains tax.

CORE Realty Holdings or its affiliates cannot provide advice regarding specific tax consequences. Investors considering an IRC 1031 tax deferred exchange and a tenant in common ownership, should seek the counsel of their accountant and attorney to obtain professional and legal advice.

For more information please contact us.

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